Cash Balance. Owner Only Plus. 401(k)/Profit Sharing

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1 Cash Owner Only Plus 401(k)/Profit

2 What is a Cash Plan? 2 Defined Benefit Plan that looks like a souped-up Money Purchase Plan Like a Money Purchase Plan, fixed contributions are credited to each participant as a percent of pay or a dollar amount Contributions far exceed $51,000 limit of Money Purchase Plans Gains & losses are not allocated. Interest is guaranteed usually 3 to 5% Beginning Pay Credits Interest Credit (Defined in Plan Doc.) Ending

3 Lump Sums 3 Cash Plans promise to pay Account s based on pay credits and interest rates defined in the plan document A Cash plan is easy to explain. You can always calculate your hypothetical balance regardless of investment results The hypothetical account balances cannot exceed the maximum 415 lump sum limits Beginning + Pay Credit + Interest Credit = Ending Most Cash plans pay the hypothetical balance as a lump sum when a participant retires or terminates With Cash plans, your focus should be on the hypothetical balance and the 415 maximum lump sum, not the monthly pension.

4 Only Owner - Age 53 - Corporation 4 with W-2 of $300,000 Hypothetical account cannot exceed Maximum 415 Lump Sum. The maximum 415 lump sum at retirement, is $2 ½ M. A Pay Credit of $161,844 will result in a lump sum of $2.0M A Pay Credit of $202,469 will accumulate to $2.5M. Since the Hypothetical would exceed the 415 maximum lump sum in years 1 to 9, the plan would limit it to the maximum lump sum. Define the Pay Credit to be such that the Hypothetical balance as of the last day of the Plan Year is always equal to the 415 maximum lump sum. See the variable credit column.

5 Cash 401(k)/ Profit 200,144 5 A 401(k)/Profit can be combined with the Cash plan to increase the contribution by $38,300 to $200,144. Age W-2 Income Cash 401(k) Deferral Profit , ,844 23,000 15,300 6% of W-2 Total Contribution

6 W-2 Wage Earners 6 Age W-2 Income Cash 401(k) Deferral Profit ,000 68,900 17,500 7, , ,770 17,500 9, , ,224 23,000 12,000 Total Contribution Samples of Corporation with Owner Only Employees At age 46, cash contribution is 75% of pay Profit is 6% of W-2 (6% of $150,000 = 9,000)

7 Compensation 7 W-2 Common Law Employees Owners of Corporations Owners of S-Corps (exclude K-1s) Earned Income Sole Proprietor/Partners Owner of L.L.P.s Owner of L.L.C.s if structured as Partnerships else W-2

8 What is Earned Income? 8 Compensation for a self-employed individual (sole proprietor or partner is earned income. To calculate earned income, we start with his Schedule C or Schedule K-1 in the case of partnerships. Start with the Net profit from Schedule C or Schedule K-1 Net Profit = Earned Income + Self Employed s Contribution + ½ Self Employment Tax Earned Income = Net Profit - ½ SE Tax SE Contributions

9 Contribution for the Self-Employed 9 Age Schedule-C Income Earned Income Cash 401(k) Deferral Profit Total Contribution ,000 49,350 68,900 17,500 2, ,000 53,497 84,236 17,500 3, ,000 77, ,945 23,000 4,660 Sample contributions for Sole Proprietors. Cash for Age 46 is almost double his Earned Income Profit is 6% of Earned Income (6% of $53,497 = 3210)

10 Compare 10 Age W-2 Income Cash 401(k) Deferral Profit Total Contribution W-2 Income ,000 68,900 17,500 7, , ,770 17,500 9, , ,224 23,000 12,000 Age Schedule-C Net Profit Earned Income Cash 401(k) Deferral Profit Total Contribution Schedule C ,000 49,350 68,900 17,500 2, ,000 53,497 84,236 17,500 3, ,000 77, ,945 23,000 4,660

11 Age 36 consultant earns $130,000 (Schedule C Net Profit) 11 Cash 401(k) Deferral Profit Total Contribution 68,900 17,500 2,960 89,360 Earned Income Cash Profit ½ Self- Employ Tax Sched-C Net Profit 49,350 68,900 2,960 6% of 49,350 8, ,000 How could he afford to make a total contribution of $89,360 and live on less than $50,000 of earned income? This could be a side income from consulting and he has a stable income he can live on. Or, his spouse could be a successful Executive at a large company and they want to save for retirement as much of his income as possible.

12 Consultant with Schedule C Net Profit of $130,000 & Earned Income of $49, The Maximum 415 limit is 613,050 at retirement age 62. A level credit of $11,214 to retirement will accumulate to $613,050. Annual contribution of $68,900 for 9 years will not exceed the Maximum 415 Lump sum. YEAR 10, HE CAN TERMINATE THE PLAN AND ROLL IT TO AN IRA AND CONTINUE THE DC PLAN

13 Consultant with Schedule C Net Profit of $130,000 & Earned Income of $49, Comparing different plan types to an Owner Only Plus

14 Watch the Lump 14 Sum Grow Pay credits of $68,900 will accumulate to $784,048 after 10 years. The Deferral and profit sharing contribution of $20,461 will accumulate to$257,358 after 10 years. The combined plan amounts to about a total of $1M. The Cash Plan can be terminated and rolled over to an IRA. The Contribution to the 401(k)/PS plan can continue with $51,000 contribution until age 50 when it goes up to $56,500.

15 Upside 15 Downside Upside: Significantly higher contribution/tax deduction Easy to explain plan s promise of hypothetical balance Can apply to Owner and his/her spouse No non-discrimination or ADP testing Easier to administer Lower administration fees? Downside: Cannot hire employees or it will limit owner contribution No prototypes Determination Letter expense if submitted

16 Assumptions 16 Assumed no past service. Actuarial Equivalence: 5% pre-retirement 5% Post Retirement with 94 GAR mortality Cash Interest: 5% Retirement Age: later of Age 62 or 5 years participation